It gives me great pleasure to be in Bahrain today and I am grateful for the opportunity to address this gathering of distinguished participants to share our views in SAMA on the prospects for Islamic banking and the challenges facing it in these interesting times.
Today, I would like to talk about three subjects:
- The evolution of the Islamic financial services industry globally,
- our experience in Saudi Arabia, and
- challenges that we must overcome for Islamic banking to achieve its full potential.
- Islamic Banking Worldwide
Looking globally over the past two decades, it is striking to note that the Islamic banking industry has shown a far higher level of resilience than conventional banking during the international financial crises that we witnessed.
Islamic finance is estimated to have been growing globally at an annual rate of more than 10%. This growth and resilience suggests that Shariah-compliant banking might have more to offer than simply being a way to serve the needs of the 1.5 billion Muslims around the globe.
Shariah-compliant financial products may provide a better risk/reward solution that can prove attractive to all types of customers (whether individual, institutional or corporate) as an alternative to conventional banking products.
Over the past decade, the Islamic banking industry has undergone a major transformation.
The financial architecture of Islamic banking has expanded rapidly due to noticeable growth in demand. In addition to full-fledged Islamic banks, many non-bank financial institutions are now offering Shariah-compliant financial services, and it is now common to see an Islamic financial group comprised of a bank as well as finance, leasing and takaful companies.
In many countries with large Muslim populations, the domestic banks are competing aggressively in the Islamic banking arena, competition that is now further heightened by the entry of the major international banks.
This healthy competition has led to the development of a range of new products and instruments to better serve customer needs, a development that we all welcome.
- Saudi Arabia's experience
The development of Shariah-compliant financial services and products in Saudi Arabia has been market-driven, with banks and other financial institutions responding to their customers' demands. As a matter of policy, SAMA encourages all regulated institutions to be responsive to the needs of their customers and has always supported the development of products that meet those needs.
All twelve Saudi banks offer Shariah compliant finance as do several of the branches of the foreign banks that we licensed to operate in Saudi Arabia. The Saudi retail banking sector is overwhelmingly comprised of Shariah-compliant products, and we note significant growth in Shariah-compliant products for the corporate sector, growth that we expect to see continue over the next decade.
SAMA has ensured an operating environment that is supportive to Shariah-compliant products. We have, as one example, ensured the availability of specialized training for the banks' staff as well as our own staff in Islamic banking.
SAMA, as a matter of principle, pursues a proactive and forward-looking approach in executing its mandate as one of the regulator and supervisor of the financial services industry in Saudi Arabia. We have for long adopted a risk-based framework for the regulation and supervision of banks and other financial institutions and, over the years, we made many improvements to our supervision methodology in line with changes in international standards and best practices.
We have implemented all the relevant major standards and guidelines issued by the standard setters including the Basel Committee on Banking Supervision, the Financial Stability Board, and the other relevant standard-setting bodies.
Equally important, because of our continuous engagement with market participants, SAMA has succeeded in instilling a strong culture of risk management and good governance in the banks it regulates.
The robustness of SAMA's regulatory approach is reflected in the sound financial condition of the individual banks and in the prized stability of the Saudi banking system.
The risk of a Shariah-compliant product is assessed and managed using the same principles of assessing and managing risks as a conventional one.
We are convinced that this approach has helped the development of innovative and robust Shariah-compliant financial products and services in Saudi Arabia, as evidenced by the growth that we have witnessed.
Shariah-compliant assets have undergone substantial growth in Saudi Arabia over the past decade. As of June 2016, 51% of the total assets of the Saudi banking system and 67% of its total liabilities were Shariah-compliant, the highest level among countries in which both conventional and Islamic banking products are widely available.
Furthermore, Saudi Arabia is holding about 19% of the global Shariah-compliant assets and is likely to host no less than 25% of the world's Shariah-compliant assets by 2030.
Outside the banking industry, it is important to note that the entire Saudi insurance industry is Shariah-compliant and that most of the non-bank finance companies SAMA has licensed are offering Shariah-compliant products in personal finance, leasing and mortgages.
- The challenges Ahead:
We believe that there are further substantial growth opportunities for Islamic banking ahead but there are also challenges, challenges that we must overcome for Islamic banking to achieve its full potential.
I would like to highlight four of these challenges.
The first challenge I would like to highlight is human capital.
The fast-growing Islamic banking industry requires qualified and well-trained people in many disciplines and at all levels. We urgently need focused efforts, efforts that must be coordinated amongst regulators, banks and standard-setting bodies to identify the specific areas where there is scarcity of human capital. We then need to create programs to meet the growing demand in the Islamic banking industry globally, programs like those provided by the Accounting and Auditing Organization for Islamic Financial Institutions here in Bahrain for professional qualification programs and for the corporate compliance program.
The second challenge is that of unifying standards.
A universally-accepted set of accounting and auditing standards to be adopted by the Islamic banking industry globally is needed to establish transparency and unify disclosure requirements. Such unified standards will comfort banking regulators and supervisors and thus allow the Islamic banking sector to grow and compete in a level playing field without creating systemic risks.
The Islamic Financial Services Board (the IFSB) has been instrumental since its establishment in 2002 in guiding institutions offering Islamic financial services and their supervisors. Over the past decade, the IFSB has acted as the bridge between standard setters for the conventional financial industry and Islamic finance; its work has helped many Islamic banks and their supervisors in adopting standards equivalent to those followed by conventional banks.
The third challenge is that of Sharia compliance.
The challenge here is achieving the appropriate balance between unifying the fragmented and differing interpretation of Shariah thus achieving more consistency among Shariah boards so that products become more standardized to encourage secondary market liquidity, on the one hand, and allowing the different Shariah boards to explore new options and thus spur innovation and competition on the other.
Islamic finance products should not only be Shariah-compliant but should also be commercially viable and this requires that the Shariah scholars be not only expert in Islamic jurisprudence but also familiar with the legal, accounting and financial structures that underlay the Islamic financial products and instruments.
The fourth major challenge is the management of the liquidity risk.
The interbank market for Shariah-compliant instruments is both small and inactive. Despite the evolution and the continued development of new treasury and capital market instruments to meet market and customers' needs, the lack of depth in the interbank market for Islamic instruments and its illiquidity will have wide and serious implications for the industry's further growth. This is exacerbated by the "buy and hold" mentality of many investors, particularly in the Gulf market.
In this regard, we must also note the dearth of high-grade government Sukuk, the Islamic equivalent of the conventional "risk-free" government bonds, which are used by the banks as collateral in the conventional interbank market.
In conclusion, I sincerely hope that the deliberations of our conference will provide the opportunity to come up with actionable recommendations on how to meet the challenges we face as we continue to grow the market for Islamic financial services.
Thank you.
